Fannie, Freddie now allowing loans worth 125 percent of home value
Filed under: Economy
The Obama administration's plan to help struggling home owners refinance ARMs into affordable fixed-rate loans has hit a snag: So many distressed borrowers are upside down on their homes that they can't qualify for refinancing.Enter the Federal Housing Finance Authority, which announced on July 1st that it had authorized Fannie and Freddie to begin making 125 percent loan to value refinancing loans under the Home Affordable Refinance Program -- the previous max was an already ambitious 105 percent loan to value (LTV).
Under the new plan, someone will be able to refinance a $250,000 loan on a home that is only worth $200,000 which, of course, runs counter to the whole idea of mortgages: How can you make a loan for more than the value of the underlying collateral? That's not a mortgage!
"I am pleased to join Secretaries Donovan and Geithner in announcing this expansion of the Obama Administration's Making Home Affordable program," FHFA Director James Lockhart said in a press release. "The higher LTV refinancings will allow more homeowners to strengthen their finances by taking advantage of lower mortgage rates. The Enterprises are also incenting these borrowers to combine a lower mortgage rate with a faster amortization schedule, which will enable them to get 'above water' on their mortgages more quickly. This program could assist many homeowners who otherwise would have difficulty refinancing due to declining house prices," Lockhart said.
The idea is that by making the new loans 20- to 25-years in duration, borrowers will pay down the principal quickly and, after a few years, will no longer be upside down by the same magnitude.
The loser is, of course, the taxpayer -- sound familiar? -- now on the hook for mortgages to people with a history of financial problems who now owe more on the home than it's worth.
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Reader Comments (Page 1 of 1)
7-07-2009 @ 1:05AM
Brian Urbancic said...
Please explain your reference to borrowers with a "history of financial problems." This program is designed for borrowers with strong credit and income whose only failure is that the housing market turned against them. And how do the taxpayers lose? They are already "on the hook" for these loans as Fannie Mae and Freddie Mac already own them!
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7-23-2009 @ 12:16AM
Home Loans said...
Brian, its a perfect question. m also looking for its answer.
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7-07-2009 @ 9:51PM
Laura Irizarry said...
Ok, let's give a 250,000 loan on a home worth 200,000, this is how the whole mess started, everyone is over financed, there is no safety net. We who have good salary jobs should have at least 6 months in savings, commissioned people like me should have 12+ months in savings. In savings, not you 401 or IRA. We should be stashing 35% in our 401 & IRA's. This is why we are mortgage to the top. What do we own, everything is financed, that means the bank owns your belongings not you. Our country has a ton of debt that was sold to China, China owns more of America than America does. What will happen if they call in the debt? We might think times are bad now, just wait, it will get worse before it gets better. Save, save, save. Sell what you don't use, don't buy what you don't need right now and feed the piggy bank. This is just side stepping the real problem, if we use this type of creative financing, it will be just a short time before these mortgages go into foreclosure and we'll have another wave to go through.
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7-10-2009 @ 3:30PM
Paul M. said...
Regardless of what happens in the housing market (price up or down) - people should have bought / buy only houses that they can afford. Period.
If you can afford to pay for a house that the value went down on - you should still be able to pay the loan (what does the loan that is pre-existing have to do with the current market value, outside of people trying to get equity loans or were over their heads to begin with) and just ride out the market until values go back up.
Needing help with payments means you couldn't REALLY afford your house in the first place (interest only ARM = can't really afford it) .
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